BSEB Bihar Board 12th Entrepreneurship Important Questions Long Answer Type Part 1 are the best resource for students which helps in revision.
Bihar Board 12th Entrepreneurship Important Questions Long Answer Type Part 1
Question 1.
What do you mean by product and product mix? What are the product dimension?
Answer:
A product means that is can any physical object or in form of services which satisfy a buyer’s needs. It is marketing structure in which the constituents or composition of a product are determined. According to Philip Kotler, “It is a paraphernalia of physical services or detailed descriptions which have the potential of giving advantages and satisfaction to buyers of a product.”
Product mix: Product mix is the main element, organ, constituent of marketing. It helps in determining the colour, size, design, line and group of a product, which are known as product mix. Such decisions are generally taken with regard to the product dimensions which have already been explained earlier.
Product dimensions: There arc several dimension of product. The marketing personnels must take care of each of the dimension. These dimensions are mentioned underneath:
- Product line
- Product size
- Product output
- Product width
- Product quality and standard
- Product Brand
- Product labelling
- Product despatch
- Product packaging
- Product design
- Product development
- Product testing
- Post sales service etc.
Question 2.
What is meant by Brand? Explain the characteristics of a good brand.
Answer:
Meaning of Brand: A brand is name, term, sign, symbol, or some combinations used to identify the products of one firm and to differentiate them from competitive offerings. A brand or trade mark is an integral part of the symbol appearing on the product. A buyer identifies the product with the brand name and the seller gets a chance to earn goodwill in the market. According to American Marketing Association, “A brand name is that part of the brand consisting of words or letters that comprise a name used to identify and distinguish the firms offerings from those of competitors.”
Brand name gives the product a distinguishing mark which differentiates it from the products of the competing companies. For the buyers as well as sellers, the marketing process, becomes more easy with the brand name.
The brand mark is a symbol, design, or other element of a brand that cannot be spoken. It could be recognised by sight only. For example, the symbol of ‘Maharaja’ of Air India, the inscribed polo player on Ralph Lauren Polo Shirts, etc.
Branding is the management process by which a product is branded. It is a general term covering various activities such as giving a brand name to a product, designing a brand mark, and establishing and popularising it.
Characteristics of Brand : A good brand name is itself helpful for advertising and publicity in the market. Name of the brand must be carefully selected. Even the multinational marketing firms face a particularly acute problem in selecting brand names. A very good brand name in one country may prove disastrous in another.
However, following are the essential characteristics of a good brand name:
(i) Easy to pronounce: The brand name should be simple, short and easy to pronounce for people of different cultures and for illiterate persons. Sometimes, people cannot pronounce certain words correctly and then they feel hesitant to ask for those products eg., Crompton, Raymond, Liberty, Woodland etc.
(ii) Easy to remember: The brand which is easy to pronounce arc also easy to remember. These products are easy to advertise.
(iii) Bight connotation: A brand should itself suggest, something about the product – its use, quality, nature, purpose, performance or action. Whenever a buyer sees or hears a brand name, some short of image is formed in mind, eg., Chayavan Prash, Vico Vajardanti, Nescafe Coffee, Tiger Tea, Dcvdarshan Dhoop etc.
(iv) Legally protectable: The brand name should be legally protected under the legislation. It should not contain any name based on geographical, historical or a name which is used by the general public in the general sense eg. Ghee, Cola, Transistor, etc. The name should be the creation of the producer like Nirma, Wheel in case of washing powder. Lux, Hamam, Rexona in case of toilet soaps.
Question 3.
Mention the main characteristics of successful entrepreneur.
Answer:
There are following characteristics of a successful entrepreneur:
1. Leadership: An entrepreneur is essentially a leader. According to K. L. Sharma a psychologist entrepreneur, arc men who exhibit qualities of leadership in solving problems. They have to lead a team for achievement of goals. For this purpose they have to build a team of motivated persons and also to provide them appropriate environment for their growth. Thus, an entrepreneur must have all universally accepted qualities of a leader, i.e., initiative, high energy level, self-confidence, human relations skills, motivational skills, creativity and desire to solve problems.
2. Risk-bearing: Another important feature of an entrepreneur is risk-taking which distinguishes him from a manager. A manager also does more or less same thing as of an entrepreneur, with the only exception of risk-bearing function. An entrepreneur undertake those risks which are well thought and well planned. Business risks arc unpredictable but still an entrepreneur, with rational planning and firm decisions bears the risks. An entrepreneur innovates an idea and undertakes risk of commercially exploiting that idea by investing his funds, because he recognise the fact that higher the risk, the greater is the profit.
3. Innovativeness: Customer’s requirements and tastes keep on changing, therefore, production should meet the customer’s requirements. Thus, innovativeness is another important characteristic of an entrepreneur. He has to initiate research and innovative activities to produce goods according to changing demands of consumers. He always tries to out strive others by taking initiative in doing new things, i.e., exploring new products, new markets, new raw material, new methods of production, etc.
4. Goal-oriented: Entrepreneur is goal-oriented. He gets happiness by setting goals and striving for goals one by one. First, he sets a goal to achieve, i.e., to earn profit by producing goods and services and after reaching one goal leads him to set up another goal.
5. Decision-maker: Entrepreneur is regarded as decision-maker. He has to take many decisions to put his business idea into a reality. He recognises an idea, i.e., a product, service or market and out of various alternatives he has to make a choice between them before time. This involves decision-making to choose the best suitable and profitable alternative.
6. Highly Optimistic: A successful entrepreneur is always optimistic and is not disturbed by the present problems faced by him. He is always optimistic for future that the situation will become favourable for business in future.
7. Motivator: An entrepreneur has to get the work done through others. He has to create a spirit of team work and motivate them so that he gets their whole hearted co-operation.
8. Human relations ability: An entrepreneur has to deal with a number of persons, he must have good human relation ability to deal with them, i.e., customers employees, suppliers and creditors. Without this ability, the changes of his success will be doubtful.
9. Self-confident: An entrepreneur should have self-confidence in achieving his goals, otherwise he will not be able to convince his fellow beings to achieve his goals.
Question 4.
Explain any four/five features of ‘Planning’.
Answer:
Five features of Planning:
1. Planning focuses on achieving objectives: Planning enables the organisation to achieve determined goals in an efficient and organised manner.
2. Planning is the primary function of management: Planning lays the basis for all other functions of management. All other managerial functions are performed within framework of plans drawn. It precedes all other functions.
3. Planning reduces wasteful and overlapping activities as it coordinates work of all individuals and departments within an organisation. It provides clarity and direction and helps in avoiding misunderstanding and confusion. Useless and redundant activities are minimised and eliminated.
4. Planning promotes innovation: Planning is the primary function of management. It encourages new ideas to take shape as concrete plans. It serves as a guideline in shaping all activities which would affect growth and prosperity of the organisation in the future.
5. Planning is continuous: Plans are drawn up for a specific period of time-monthly, yearly etc. At the end of the period plans are revised and reviewed on the basis of future conditions. Hence planning is said to be a continuous process.
Question 5.
Explain any two facts while selecting a product.
Answer:
1. Market Assessment: Market assessment is to be prioritised prior to the selection of a product or a service. The market for the product would be at regional, national or international level. If a ‘product’ is already existing in the market, the entrepreneur has to determine the reason why he is launching the similar product and in comparison with the existing merchandise, what the market reaction to the new product would be like.
But in case that the product being launched is absolutely novel, he has to conduct a market survey and ascertain about the prospective consumers for the product/service. Therefore, after conducting a study of the market, it should be decided whether the product is to be introduced in the market or not. The market assessment involves demand, supply, the cost of production, price, competition, scope of innovation, the market aspiration, advertisement and publicity and its impact on the market etc. need to be assessed.
2. Cost of Production: Following the market assessment and the product’s practicality, cost per unit needs to be reckoned to ensure if the product-cost may not be exceeding so that the customers keep glorifying or cherishing the product at a distance without responding practically to it. Notwithstanding the peculiarity of the product in terms of its novelty, the price must be suitable and affordable in accordance with the consumer’s paying capacity.
For instance, if an entrepreneur is pondering over to launch some powder which by pouring it into a scooter fuel tank, the scooter can run forty kilometres without petrol and such a concept is definitely a revolutionary one which would liberate the consumer from the fuel crisis. But the cost of which is around Rs. 60/- per 100 gram, it is natural that no customer would buy it. As such, the entrepreneur must not bring it into the market until the petrol price looks up more than the powder’s price. Therefore, the product identification and the cost of production has a vital role to play on this account.
Question 6.
What factors should be considered by an entrepreneur while selecting an enterprise?
Answer:
Factors to be Considered in Selection of an Enterprise: An entrepreneur must not rush to a hasty decision in this regard rather he must consider the following prior to resorting to any final decision:
1. Easy Formation: If an enterprise is soon and conveniently to be established, sole trading is recommended. For a partnership the same minded partners with the same idealogy have to be taken into the fold. In case of joint stock company and co-operative society various legal and constitutional formalities are to be furnished alongwith the registration. Therefore an entrepreneur after a careful consideration should make the selection of the enterprise because all the patterns are strewn over with pros and cons.
2. Types of Business Activities: An entrepreneur ought to select his enterprise according to his business activities. If it is a small scale enterprise or individual service, i.e., barber, tailor, jeweller, etc., sole trading is recommended. In the event of a large enterprise, partnership or a joint enterprise may be opted.
3. Direct Control: If an entrepreneur wants to keep a strict control over the business activities and is not willing to brook any interference or contradiction, he must prefer sole trading or personal and private company.
4. Area of Operation: In case the area of an enterprise is limited and confined to local area the sole trading will be the most suitable one but if it is a vast area or at national or international scale the enterprise should be in the form of a company.
5. Availability of Capital: If the availability of capital is adequate and the entrepreneur is self-sufficient he must prefer sole-trading otherwise the partnership would be suitable and if much more capital is required then the formation of a company would do better.
6. Secrecy: Sometimes according to the types of business, ensuring secrecy is very essential. In this case only sole-trading is the best option because in case of partnership, maintaining secrecy remains problematic.
7. Stability and Continuity: The life of sole trading is directly linked to the life of an entrepreneur which lasts as long as does the other. The life of a partnership enterprise does not sound stable and if the stability in business is desirable then it must be done in the shape of a company.
8. Government Regulations: Each and every trade, quite often, has to observe the Government rule and regulations. These regulations vary according to the size of the enterprise or on the basis of the ownership, for instance, a sole trader or an enterprise of partnership is meant for a small scale business which does not fall much under Government regulations, whereas in large scale business enterprises there are many legal complications and in this case, each each function is subjected to legal formalities within the purview of Government regulations.
As such in view of the above considerations, an entrepreneur has to make a judicious selection of his business enterprise. The impact of each factor as per his capacity, nature of the merchandise on the basis of the market environment he should select his enterprise by ensuring his own future prospects and the viability of his enterprise.
Question 7.
Mention the different kinds of planning.
Answer:
Kinds of Planning: In a business many kinds of planning are involved which can be categorised in the following ways:
(A) On the basis of Functions: The operation of any business takes place at three levels and each level requires different planning:
- High Level Plans: High level plans refer to the general policy of the organisation, objectives, market and expansion, etc., and the relating strategics are formed by the top management.
- Middle Level Plans: For achieving the targets determined by the top management, some strategics arc formed at the middle level management which facilitate the process of realisation.
- Low Level Plans: This plan refers to the job-distribution and such plans arc decided at lower management level.
(B) On the basis of Period: The factor of period in the planning process has a significant place. Which target is to be achieved when, is predetermined. In this context, the planning is of three kinds:
- Short term Plans: When a plan is formed on one year basis or less, it is termed as short term plan.
- Middle term Plans: When a plan period is bracketed for one to five years for completion it can be termed as middle-term plan.
- Long term Plans: The plan of which the completion is intended more than five years is known as long term plan.
(C) On the basis of Use: On the basis of use, the plan can be formed in two kinds:
1. Standing Plans: This kind of plans is worked out for only once which determines the process of operation, framing for the smooth running of the organisation policies and strategies etc. On the basis of these plans the operation of the organisation follows.
2. Single Use Plans: In the event of a specific condition to explore a solution for it, a single plan is thought of which is accomplished after its execution. Determining of budget or conceiving of a specific plan is the example of ‘Single Use Plan’.
Question 8.
What are the various stages or phases of project preparation?
Answer:
Stages or Phases of Project Preparation: Project preparation refers to the stage prior to the careful consideration of all aspects and giving them a final shape to the new project, for without repeated contemplation and meticulous analysis, starting any project does not seem logical and rational. Therefore, in the process of project preparation the planning has to undergo various tests and stages and then a final decision whether or not to go ahead, is taken. As such there are the following six stages which are required for project preparation:
- Project Identification or Phase of the Origin of Project Idea.
- Project Formulation Shape.
- Project Appraisal.
- Section of Project.
- Project Implementation.
- Project Commissioning.
Question 9.
What main points should be taken in mind while formulating a project report by an entrepreneur?
Answer:
Formulation of Project Report: Preparing of a project report is very essential for an entrepreneur however, a definite line of action cannot be determined because every project is of a distinct nature and size. Moreover, for a low profile or a small scale enterprise any project report is superfluous and undesirab1e. Generally, the following points are to be considered in preparing a project report:
1. General Description: A project report contains the description of the entrepreneur’s name, address, qualification and experience etc. If the project has partnership, then the profile of all partners is mentioned and in case of a company the details of the promoters are given therein. Apart, if the project report is related to which kind of business, its present and past status, problem and analysis etc. are detailed. It also informs about the volume of production, nature and prominence of product in comparison with the rest of the products, etc.
2. Description of the Project: Under the title a comprehensive information with regard to the project is provided, like its location, the resources of raw material and skilled labour and the way of its procurement, etc. Besides other basic amenities like water, electricity, fuel and transportation, etc., are also mentioned. What are the different stages of production? For all this arrangement, the machines and equipments are to be arranged from where and what would be the cost? What would be the capacity? What are the possibilities of its expansion in the coming future?
3. Market Potential: Under this title, the possibility of the status of the product, as it is likely to assume in the market in future is also highlighted. What is the present status of the merchandise and what is it likely to be in future? What could be the selling price for it? What would be the selling strategy? What kind of service would be after sale? What would be the transportation system for dispatching the goods outside? etc.
4. Sources of Finance: For a successful operation of any project it needs finances. Both the fixed capital and the working capital are separately described. How much and from where the finance is to be generated? What would be the personal investment by the entrepreneur? What would be the sources of the rest of capital?
5. Other Financial Aspects: This segment envisages the projected profit and loss and the Balance Sheet etc. The extent of the projected profit and the economic status of the project can be ascertained from it. Besides the break-even point of a product is also indicated here. Which would determine as upto what extent the production or sale be increased where no profit, no loss status could be arrived at. To reckon this status the following formula is used:
BEP = \(\frac{\mathrm{F} \times \mathrm{S}}{\mathrm{S}-\mathrm{V}} \times 100\)
where, F = Fixed Cost, S = Projected Sales, V = Variable Cost
6. Economic and Social Effects: The effect of a project on society is both sweet and sour. Thus, this subtitle must show the adverse effect of the project on the environment in addition to the healthy social and economic effects like, the rise in employment? What would be the benefits to the society? What would be the resultant development of the area? etc.
7. Time Boundness: In a project report there should be a reference to the time frame for the completion of the task and the entrepreneur must take a pledge in this context otherwise a substantial loss may be inevitable. Any delay adds to the cost and several new (unforeseen) hurldles start coming up resulting in a lot of misapprehension.
Question 10.
What is the role of an entrepreneur in the mobilisation of resource?
Or, Explain decision which have to be taken into consideration under the head material resources.
Answer:
The success of any entrepreneur is attributed to his sensibility that how he identifies and explores his resources that could prove to be the most useful ones to get his goals. While mobilising the resources he must ensure that they be in the right direction.
In this context, he needs to take care of the following:
1. Need of Resources: First of all an entrepreneur must determine the kinds of resources that are required? In view of his needs the resources are to be identified and selected.
2. Identification of Resources: After having determined the resources the entrepreneur needs to identify these resources and plan how to secure and ensure their availability?
3. Study of Difficulties: It is not that easy to avail of the resources. What kind of difficulties are to be negotiated for procuring the identified resources. This aspect needs a careful prior consideration so as it becomes convenient to move ahead.
4. Contact with Suppliers: In every resource viz. land, machine, capital, labour etc., there is an owner in terms Of an individual or of some organisation. As such, an entrepreneur, to ensure a supply of the resources has to contact with the concerned suppliers.
5. Quality and Timing of Resources: Which resource of which quantity and within a specified time span, will be required? An entrepreneur has to determine these factors.
6. Quality and Cost of Resources: An entrepreneur while managing resources must take care of the quality against the cost. He must ensure that the quality is desirable or not.
7. Financial Arrangement for Purchasing Resources: Finally, the entrepreneur is to see to it that how the resources will be purchased. Will he be able to arrange finances for that?
Question 11.
How would you determine the requirement of working capital?
Or, Describe the factors affecting the working capital.
Answer:
Determinant Factors/Elements of Working Capital: Following are the factors in this respect:
1. Nature of Business: The major factor that influences the most the working capital is the nature of business. Public welfare business units, like railways, roads and gas, etc., are the enterprises where less working capital is needed. The reason of it is attributed to the constant demand in terms of the services and the payment is ensured instant.
In some of the transport services, the advance payment is realised from the consumers. Whereas on the other end, in the manufacturing and commercial business units where a large quantity of stock is kept and the sales of which is done on credit basis, here a great amount of working capital has to be kept in reserve.
2. Length of Manufacturing Process: The period of production refers to the time consumed in the process of converting raw material into finished product. If the production process is long time taking, the conversion obviously will take a longer time, more cost and more labour will be involved, as a result, the working capital in a large amount will be required. On the contrary, where the production process is not so time-taking a lesser amount of working capital is needed.
3. Size of Business: The amount of working capital which is required in a business is directly linked to the size of business. The bigger the size of a business unit, more the working capital is required. Contrary to this, the smaller the size, lesser the requirement of working capital.
4. Trade/Business Cycles: Trade/business cycles also impinge upon the amount of the working capital. A business or a trade ever remains vulnerable to market fluctuation. When the cycle gains momentum, the demand increases resulting in a hike in production and prices as well that leads to the trade expansion or development. In order to tone up the business the concepts of modernisation are exploited and this act also involves a lot of working capital.
On the contrary, when the market is looking down, there follows a decline in the sales of merchandise hence decline in both the production and prices. Even the growth of the trade vibration gets stilled and stifled and in that case there is a meagre need of the working capital.
5. Level of Competition: Every trade is vulnerable to the impact of competition that has its bearing upon the working capital. In the event of tremendous and fierce competition more is the requirement of working capital so as to captivate and fascinate more and more customers even the sales on credit policy may be resorted to and also by giving various kinds of discounts and other attractive offers.
In that case, a large amount of working capital is required. Whereas, on the other hand, in the absence of competition, a lower amount of the working capital is needed. The reason being that the sales of the products is in the form of cash and even the customers make an advance payment too.
6. Terms of Buying and Selling: Terms of buying and selling have their effects on the amount of the working capital. If any business unit receives raw material and other services on credit basis, lesser the amount of working capital is required and in case, if a unit buys raw material against cash payment and sells the finished goods on credit, then an excessive amount of working capital remains in need.
7. Dividend Policy: When an organisation adopts a provision of dividend policy, it requires a large amount of working capital for the disbursement of dividend. In other cases, the companies which do not disburse dividends or disburse at a very low level or issue the bonus shares, need a lesser amount of the working capital.
8. Banking Relations: The banking relations of any commercial unit have a tremendous impact on the amount of working capital. In the event of cordial and harmonious relations with the banks and have earned their credibility, the commercial enterprises can easily obtain finances on easy terms, whenever the need for finances comes up, and as such, a lesser amount of working capital is needed. But quite contrary to it, a large amount of this capital is required when the banking relations arc not so strong.
9. Seasonal nature of Business: The business of several companies is brisk in specific season of a year in which the companies are in need of maximum amount of working capital. The sugar mills in India are the glaring examples of it. The production in these units continue from November to April and the maximum capital (working) is needed during this period.
The trades related to wool, electric fans, water coolers and refrigerators have to weather other kinds of hardships. In most of these trades the production is all the year oriented but the sales are restricted to a specific season. Till the advent of the season the stock of goods remains dumped of which the maintenance cost is expensive that needs a large amount of working capital and in order to meet the maintenance cost on the guarantee of such dumped stock, a loan is obtained from the banks or the stockists on short term basis.
10. Normal Rate of Expansion in the Volume of Business: After the start of a project the rate of growth or expansion for a couple of years remains slow but gradual. Following the growth of business, more working capital is needed. There needs to be a proportionate equilibrium between the growth and the amount of working capital otherwise for want of the funds the process of expansion gets stilled or hampered. Generally, the expansion is mobilised with the profit earned in terms of its reinvestment.
Question 12.
What are the major requirements of working capital in business?
Answer:
Importance/Advantages/Need of Working Capital: The way in order to remain alive food is essential for man similarly in order to sustain a business the working capital is essential but it is fatal if the working capital exceeds or fall short of. If there is surfeit of it, it encourages the extravagance, administrative lapses, dissatisfaction among shareholders, incredibility of the financial institutions, decline in profitability, fostering of speculation, increasing decay, corruption, like other problems etc.
On the contrary, in the event of paucity of the working capital, difficulties start raising their uglyhood in terms of operation of business, liquidity and other unforeseen problems. Therefore there should be an adequate working capital which yield the following benefits:
- Helps to maintain solvency of business.
- It is easy to overcome trivial problems unforeseen accidents and business crisis, etc.
- The appropriate business opportunities can be easily exploited.
- Board of Directors can distribute attractive dividend. The shareholders remain content and the rate of shares remain stable in the market.
- The benefit of cash discount can be availed of.
- There is convenience in disbursing the salaries/wages and daily expenditure as per schedule.
- The production is sustained.
- In business the atmosphere of safety, self-confidence, high morale and total efficiency level can be maintained.
Question 13.
What do you mean by Accounting Ratio? What are its objects?
Answer:
Meaning of Accounting Ratios:
Ratio: “A ratio is an expression of the quantitative relationship between two numbers.”
Analysis: Analysis means examination and interpretation of numerical relationship of two numbers.
Ratio Analysis: Ratio analysis means examination and interpretation of numerical relationship of two numbers. In financial analysis, a ratio is used as an index or yardstick for evaluating the financial position and performance of a firm. According to Myers, “Ratio analysis is a study of relationship among the various financial factors in business.”
Accounting Ratios: The ratios based on financial statements are called ‘Financial Ratios’ or ‘Accounting Ratios’. In short, when “ratios are expressed on the basis of accounting information such ratios are called accounting ratios.”
According to R. N. Anthony, “A ratio is simply one number expressed in terms of another. It is found by dividing one number into the other.”
According to J. Batty, “The term ‘accounting ratios’ is used to describe significant relationship which exists between two figures shown in Balance Sheet and Profit & Loss Account or in any part of the accounting organisation.”
Objectives (or Purposes) of Accounting Ratios:
The following are the main objects of ratio analysis :
- To Measure the profitability of the concern: The profitability can be measured by gross profit, net profit, operating profit ratios.
- To Determine the Operating Efficiency of The Business: Operational efficiency of the business can be judged by calculating operating/activity ratios.
- To Assess the Solvency of the Business: Solvency or otherwise of the business concern may be assessed by calculating solvency ratios.
- To Help in Forecasting and Budgeting: Ratio analysis helps in getting knowledge of the profitability and financial position of the business undertaking. It also reveals the strength and weaknesses of the business concern. It helps in forecasting, budgeting and making plan for the future.
- To Simplify and Summarise Accounting Information: Ratio analysis makes the accounting information meaningful.
- To Facilitate Comparative Analysis.
- To Help the Management in Decision-making.
- To Help in Financial Planning.
Question 14.
Explain the importance of Accounting Ratio.
Answer:
Importance of Accounting Ratios: The importance of accounting ratios can be understood by the following discussion:
(A) Importance for Management:
- Accounting ratios make the figures simple and understandable.
- Accounting ratios provide basis for preparing budgets and also determining future line of action i.e., forecasting.
- Accounting ratios facilitate comparative analysis of the performance.
- Accounting ratios help in making decisions from the information provided in the financial statements.
- Accounting ratios indicate efficiency and the profitability of the business concern.
- The financial strength and weaknesses of a firm are communicated in a more easy and understandable manner by the use of ratios.
- The operational efficiency of the business can be ascertained by calculating operating ratio.
- Accounting ratios help in assessing solvency position of the business.
- Accounting ratios help in measuring short-term and long-term financial position of the company.
(B) Importance of Investors:
An investor in the company will like to assess the financial position of the concern where he is going to invest his funds. The investor will feel satisfied only if the concern has sufficient amount of assets. Long term solvency ratios will help him in assessing financial position of the concern. Profitability ratios, on the other hand, will be useful to determine profitability position of the concern. Thus, ratio analysis will be useful to the investor in making up his mind whether present financial position of the concern warrants further investment or not.
(C) Importance to short term creditors:
The creditors or suppliers extend short term credit to the concern. They are interested to know whether financial position of the concern warrants their payments at a specified time or not. The concern pays short term creditors out of its current assets. If current assets are quite- sufficient to meet current liabilities, then the creditors will not hesitate in extending credit facilities. Current and liquid ratios will give an idea about the current financial position of the concern.
(D) Importance to Employees:
The employees are also interested in the financial position of the concern especially in relation to profitability. Their wage increase and amount of fringe benefits are related to the volume of profits earned by the concern. The employees make use of information available in financial statements. Various profitability ratios relating to gross profit, operating profit, net profit etc. enable employees to put forward their view point for the increase of wages and other benefits.
(E) Importance to Government:
Government is interested to know overall strength of the industry. Various financial statements published by industrial units are used to calculate ratios for determining short term, long term and overall financial position of the concerns. Profitability indices can also be prepared with the help of ratios.
Government may base its future policies on the basis of industrial information available from various units. The ratios may be used as indicators of overall financial strength of public as well as private sector. In the absence of the reliable economic information, governmental plans and policies may not prove successful.
Question 15.
What is Break-Even Point? How is it calculated?
Answer:
Break-Even Analysis-Meaning and Definitions: Break-even Analysis relates to the study of cost and return on investment in relation to the sales of a business unit. That point or level of sales at which the business makes no profit and no loss is termed as the break-even point. Here, the sales price becomes equal to the total cost price. Break-even point can be applied from two view points-Narrow viewpoint and Broad viewpoint.
From the narrow viewpoint, Break-even Analysis is a technique which determines that level of work at which the total return is equal to total expenditure. It means that at this point the producer neither makes any profit nor undergoes any loss. That is why this is known as the point of no profit no loss. In the broader perspective. Break-even Analysis is the study of cost of production and the amount of profit at the different levels of production.
Break-even point is that point of production or sale where neither profit nor loss is earned by the firm. It is also known as ‘No profit point’ no ‘Zero loss point’. The following are its definitions:
- According to Charles T. Horngren, “The Break-even point is that point of sales volume where total revenues and total expenses are equal, it is also said as the point of zero profit or zero loss.”
- According to Killer and Ferrara, “The Break-even point of a company or a unit of a company is that level of sales income will equal the sum of its fixed cost and its variable costs.”
Computation of Break-Even Analysis: There are two major techniques for computation of break-even analysis. It is for the management to decide as to which method would be more suitable. These methods include – 1. Mathematical Method; 2. Graphical Method.
1. Mathematical Method: This method of cost and profit margin relation is based upon the fundamental principle of marginal cost. From the convenience point of view these elements are presented in the form of an equation:
- Sales = Variable Cost + Fixed Cost ± Profit/Loss
- Sales – Variable Cost = Fixed Cost ± Profit/Loss
- Contribution = Sales – Variable Cost or C = S – V
- Contribution = Fixed ± Profit/Loss
To earn profit, it is necessary that contribution must be more than the fixed cost, and for no loss in business it is necessary that the contribution must be equal to the fixed cost. For determination of the four factors used in the Marginal cost equation these are extremely useful.
These four elements are:
- 1. Sales
- Variable Cost
- Fixed Cost
- Profit or Loss.
That is S – V = ± P/L.
Following are the different ways for determination of the Break-even point:
- Contribution
- P/V Ratio
- M.O.S.
2. Graphical Method: Break-even Graph or Chart: Break-even chart is the graphic or visual presentation of the relationship between cost, volume and profit. It depicts the point of production at which there is no profit and no loss, i.e. break-even point. It also shows the estimated profit or loss at different levels of production. According to Dr. Vance, “Break-even Chart is a graph showing the amounts of fixed variable costs and the sales revenue at different volumes of operation. It shows at what volume that firm first covers all costs which revenue of break-even.”
Steps in Preparing Break-Even Chart:
Following are the steps in preparing break-even chart:
1. There are two sides on a graph which are known as ‘areas’. The horizontal side at the bottom of the graph is X-axis, which shows the volume of production. The vertical side is the Y-axis which shows the cost and sales.
2. Preferably the graph should be in the square form. Both the areas are drawn on the basis of appropriate scale.
3. Production quantity and cost and sales are inserted on X-axis and Y-axis respectively.
4. First of all, fixed cost line is drawn on the graph. Fixed cost line is drawn parallel to the X-axis because fixed costs remain the same.
5. The total cost line is drawn above the fixed cost line. For this purpose, the variable cost is added to the fixed cost.
6. Sales revenue line is drawn commencing at zero and finishing at the last point.
7. The point at which the sales line cuts the total cost line is known as Break-even point. When a line is drawn from Break-even point to X-axis, it indicates Break-even point (units) and when a line is drawn from Break-even point to Y-axis, it indicates Break-even point (sales volume).
8. The difference between the sales line and the total cost line to the left of Break-even point indicates the loss while to the right to Break-even point indicates the profit.
Draw a Break-even chart from the following information :
